Risks

Like any DeFi protocol, using Exponent involves some risks for users.

​

Underlying protocols

An important aspect of Exponent is that every product/market offered is derived from other protocols. This means that when trading or operating on Exponent, users bear counterparty risks and should ensure they understand these underlying protocols.

As such, Exponent can be seen as a marketplace that provides access to derivative assets/markets of DeFi products. Exponent does not own or manage these third-party protocols and contracts and consequently is not responsible for any funds lost due to exploits in these third-party contracts.

​

Liquidity

Each market on Exponent is powered by an AMM pool, supplied by liquidity providers. Liquidity shortages could prevent Exponent users from operating effectively before maturity, impacting the ability to exit a trade, for example. However, regardless of liquidity conditions:

• Yield traders will always receive their yield and emissions.
• Income token holders can always redeem the underlying asset at maturity.

​

Black Swan Events

By default, Exponent only lists markets from protocols it considers robust. Robust protocols are those that have undergone multiple audits, maintain strong security practices, and either have low complexity in their code or a strong track record.

While most of Exponent’s yield markets generally cannot go negative in value—for instance, an LST cannot generate negative yield—there are cases where this could happen, such as on lending protocols where bad debt can occur and trigger socialize loss across users’ deposits. To address this, Exponent has mechanisms in place to handle socialized losses and protect the protocol’s economic integrity during rare black swan events.

If a yield market starts generating negative yield, the protocol would temporarily halt yield distributions and pause certain actions like yield stripping. Full details on how the protocol would handle a black swan event can be found here.

​

Declining value risk when yield trading

While not a protocol risk in itself, it is important for users to remember that trading floating/volatile yields with maturities means that upon expiry those positions become worthless and go to zero—unlike regular assets (e.g. SOL), which always retain a market price. Traders need to keep this in mind when opening a position.

As a general rule of thumb: as long as the implied yield at which the position is opened remains below the future average underlying yield, the position will be profitable.